Credit Suisse recommends going long on MBS
Cheap valuations, recent underperformance and a manageable outlook for supply and demand prompted Credit Suisse analysts to recommend investors go long on mortgage-backed securities. In this week's mortgage market focus report, Mukul Chhabra, Qumber Hassan and Mahesh Swaminathan said prepayments on low coupons continue to spike, while higher coupon speeds remain tame, and the MBS market "appears surprised by the spike in voluntary refis on lower coupons, while continuing to fret about auto-refi risk on higher coupons." Analysts said a higher fraction of loans provided through the government's Home Affordable Refinance Program in higher coupons "is proving to be a drag on their prepay responsiveness." "For instance, in August, 2010 vintage 5s prepaid slower than 2010 vintage 4.5s," the analysts said. "We recommend buying new production higher coupon pools with a high refi concentration as a way to hedge call risk. It may become increasingly difficult to source such pools as several originators have recently started pooling high LTV streamlined refi loans separately." Write to Jason Philyaw.